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  • Writer's pictureSteven Tobin

Higher interest rates will cause a recession – how do we pick up the pieces?

While many have challenged the pace of the Bank of Canada’s interest-rate hikes, their likelihood of success and the extent to which further increases are merited, it has already become clear that, regardless, a recession is imminent. And while it remains to be seen how deep and how long that recession will be, there is no question it will hurt some more than others.

Who will pick up the pieces?

Will governments be there to pick up the pieces and manage the consequences of higher interest rates? If so, how, and in what ways can they help, given their rather precarious fiscal position, with Ottawa carrying $1.1-trillion in debt?

Among the many things that concern us are the distributional impacts of the looming downturn – some groups are going to be more affected than others. The central bank itself, in its recent speeches on the labour market, has acknowledged that certain industries vulnerable to higher interest rates – e.g., manufacturing and construction – will be hit harder during a downturn.

Workers in those industries will also suffer, but of course, as is typical of a recession, there will inevitably be negative spillover effects in other industries, including retail. The bank’s own research indicates that unemployment could hit 6.7 per cent – that translates into an additional 300,000 unemployed people in Canada (joining the million currently without work).

What's feasible considerable current fiscal constraints

A number of things can be done about that. First, governments can streamline access to data. For example, data on Employment Insurance recipients can offer a wealth of information about workers, such as their locations and previous occupations. Data in Canada is currently only available with a considerable lag, is difficult to access and too aggregated to be meaningful for this purpose. Greater access at limited or no expense could be provided, and doing so would enable think tanks, policy makers and others to design more effective policies and programs to mitigate the impacts of the recession and promote an inclusive recovery.

Second, Employment Insurance needs a redesign to be more responsive to negative shocks and to better support workers during labour market downturns. A recent C.D. Howe Institute study shows that these goals can be achieved by implementing more uniform entry requirements, making benefit entitlement duration a function of changes in the labour market conditions and reducing the number of administrative regions.

Finally, we need to ensure that skills development is part of the suite of policies to support recovery. Although net employment change can be positive at the end of a business cycle, we have learned from past downturns and other labour market disruptions that those who benefit from job creation when the economy rebounds are not necessarily the ones who were affected by the economic contraction.

This happens for two reasons. First, people most affected by job loss often have limited access to income or training support. Second, structural shifts that take place during periods of disruption can create mismatches between labour supply and labour demand, in terms of both skills and geographic location.

So when considering programs that are designed to provide support to those most affected by job loss, it is important to bear in mind that programs that simply target socio-demographics – e.g. youth – will inevitably miss the mark. Programs should rather focus on addressing the barriers that individuals face to regaining employment – quality employment.

Well-targeted skills development programs at the federal and provincial levels, complemented by other support measures, can help workers transition across sectors, occupations and geographies. They can also help support overall recovery efforts, alleviate labour market mismatches and improve the resiliency of workers to manage future downturns.

The bank’s aggressive raising of interest rates should lead toward price stability and, eventually, lower interest rates. That should ideally help spur more balanced and sustainable economic growth and job creation. However, governments need to recognize that the distribution problem exists and make efforts to mitigate the risks for those who will lose their jobs and ensure that the recovery is inclusive.

Steven Tobin and Parisa Mahboubi.

Parisa is a senior policy analyst at the C.D. Howe Institute. The views expressed here are those of the authors.

An earlier version of this blog is available as a Globe and Mail op-ed.

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